BP OKs $20 billion spill fund; suspends dividend

Plans to cut capital spending, sell properties to offset expense

SteveGelsi

NEW YORK (MarketWatch) -- BP PLC said Wednesday it will establish a $20 billion escrow fund to compensate victims of the Gulf oil disaster and suspend $7.5 billion in dividend payments this year, moves that drew praise on Wall Street. The statements came after top BP officials met with President Obama.

In another sign of pressure in the wake of the as-yet-uncapped April 20 oil-well blowout that has become the largest such disaster in U.S. history, the British company also said it will implement a "significant reduction" in its 2010 capital spending budget of $20 billion and increase planned divestments to approximately $10 billion over the next 12 months.

BP
BP, -0.50%
(BP) said the "Independent Claims Facility" would be managed by Kenneth Feinberg, who ran the fund for the Sept. 11 terror attack victims. More recently, he acted as pay czar to investigate compensation of executives at banks that received money under the government's Troubled Asset Relief Program.

BP will initially make payments of $3 billion in the third quarter and $2 billion in the fourth quarter. After that a payment of $1.25 billion will be made per quarter until a total of $20 billion has been paid in, the company said.

"The fund does not represent a cap on BP liabilities, but will be available to satisfy legitimate claims," the company said.

Yields on BP bonds recovered from the worst levels of the day, and shares of BP rose 1.4% to $31.85 after spending much of the session in the red.

Oppenheimer & Co. analyst Fadel Gheit said the moves amount to a "positive step for BP" to reduce political pressure and public anger in the U.S. at BP and enhance the company's financial flexibility.

Philip Adams, an analyst with debt research firm GimmeCredit, said investors appeared to be relieved that BP won't have to pay for the $20 billion escrow fund all at once.

Together with a steeper sell-off of assets this year, savings on dividend payments and a $2 billion cut in capital spending, BP will free up about $17 billion, he said.

"The moves by BP take the fear of a liquidity crisis off the table," Adams said. "They're getting mild applause in the equity market and more cheers in the debt market."

In brief comments to reporters at the White House, BP Chairman Carl-Henric Svanberg apologized to the American people for the spill and said the meeting with Obama was constructive.

"He's frustrated because he cares about the small people ... We care about the small people," Svanberg said.

Separately, in one of the first major moves in several days to stem the leak, BP said oil and gas from the April 20 blowout that caused an explosion aboard and the eventual sinking of the well-drilling rig Deepwater Horizon is flowing through a second containment system attached to the well's failed blow-out preventer 5,000 feet below the surface of the Gulf of Mexico.

The new system connects to the blow-out preventer and carries oil and gas through a manifold and hoses to the Q4000 semi-submersible vessel on the surface.

BP has said the system could handle up to 10,000 barrels of oil a day, on top of the 15,000 to 18,000 barrels a day capacity from a containment cap system that's been in place since early June.

"The board remains strongly committed to the payment of future dividends and delivering long term value to shareholders," BP said in a separate statement. "The board will consider resumption of dividend payments in 2011 at the time of issuance of the fourth quarter 2010 results, by which time it expects to have a clearer picture of the longer term impact of the Deepwater Horizon incident."

BP also reiterated recent statements that the bulk of its business continues to perform well, with cash flows from operations expected to exceed $30 billion in 2010 at current prices.

In a prepared statement, Svanberg said the escrow fund agreement "will provide greater comfort to the citizens of the Gulf Coast and greater clarity to BP and its shareholders."

Chief Executive Tony Hayward said: "From the outset we have said that we fully accepted our obligations as a responsible party. This agreement reaffirms our commitment to do the right thing. The President made it clear and we agree that our top priority is to contain the spill, clean up the oil and mitigate the damage to the Gulf coast community. We will not rest until the job is done."

The cost of insuring debt issued by BP against default soared Tuesday. The spread on BP swaps widened by 115 basis points, hitting 600 basis points for the first time, according to data provider Markit.

That means it would now cost $600,000 a year to insure $10 million of BP debt against default, up from $485,000 on Tuesday.

On Tuesday, BP's credit rating was slashed six notches by Fitch Ratings on concern that the Obama proposal would mean the oil giant would settle liabilities much sooner than Fitch had anticipated.

Just hours before Obama spoke Tuesday evening from the Oval Office, the government significantly increased the estimate of oil flowing from the well, to as much as 60,000 barrels of oil a day.

Obama said BP should be able to capture as much as 90% of the oil leaking from the well "in the coming days and weeks."

Scientists said the well is spewing between 35,000 and 60,000 barrels a day into the Gulf, revising a prior estimate of 20,000 to 40,000 barrels a day.

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